AMD to buy Xilinx, its chip counterpart, for $ 35 billion in data center push

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Semiconductor designer Advanced Micro Devices said on Tuesday it had agreed to buy Xilinx in a $ 35 billion all-stock deal that would escalate its battle with Intel in the core chip market. data.The deal, which AMD plans to close in late 2021, would create a combined company with 13,000 engineers and a fully outsourced manufacturing strategy that relies heavily on Taiwan Semiconductor Manufacturing. The two US companies have benefited from a more agile approach to grab market share from Intel, which has struggled with in-house manufacturing.

AMD has long been Intel’s main rival for central processing units (CPUs) in the personal computer industry. Since Managing Director Lisa Su took over AMD in 2014, she has focused on Intel’s challenge in the rapidly growing data center industry that powers internet-based applications and services and fuel the boom in artificial intelligence and fifth generation telecommunications networks.

Xilinx has also worked to penetrate data centers with programmable processors that help speed up specialized tasks such as compressing videos or providing digital encryption. Its main rival in the region, Altera, was taken over by Intel for $ 16.7 billion in 2015 in what was then the largest deal ever by Intel.

“There are areas where we are very strong and we can accelerate the adoption of the Xilinx family of products,” Su told Reuters in an interview. “And there are areas where (Xilinx CEO) Victor (Peng) is very strong, and we think we’ll be able to accelerate some of the AMD products in those markets. ”

The tie-up comes at a time when Intel’s manufacturing technology has lagged behind TSMC. AMD, which separated its factories almost ten years ago, beat Intel with better performance chips. The performance advantage helped AMD gain its best market share since 2013 with just under 20% of the processor market, which in turn pushed up its shares by 68% between the start of the year and the end of trade on October 26.

Xilinx also uses TSMC’s factories, called “fabs” in the industry, to manufacture its chips, with the two US companies using modular designs that allow them to swap out different parts of a chip to avoid bottlenecks or delays.

“We ended up with TSMC and stayed with them, not for a contractual reason – we could go to any factory at any time – but because they are the best in their class,” Peng told Reuters in an interview. “It’s about the choices you make. ”

As part of the deal, Xilinx shareholders will receive approximately 1.7 common shares of AMD for each common share of Xilinx, valuing Xilinx at $ 143 per share, or approximately 24.8% above its stock price. close for $ 114.55 on October 26. AMD shareholders will own around 74% of the combined company, with Xilinx shareholders owning the remaining 26%. The companies said the transaction was intended to be a tax-free reorganization for U.S. federal income tax purposes.

AMD’s Su will lead the merged company as CEO, with Xilinx’s Peng as chairman responsible for Xilinx’s business and strategic growth initiatives. The companies expect the operation to generate $ 300 million in cost savings.

AMD also announced its results earlier than expected on Tuesday. It reported revenue and adjusted earnings of $ 2.80 billion and 41 cents per share, beating Wall Street expectations of $ 2.57 billion and 36 cents per share, according to IBES data from Refinitiv .

Bernstein analyst Stacy Rasgon said there was a risk that a major acquisition in an adjacent chip market could distract AMD’s leadership as Intel struggles to regain market share.

“The problem would be that AMD has its own story, which is just starting to play out. Why are you doing this now? Is it just opportunistic? Does this distract from current history? ” he said.

Xilinx’s Peng, however, said meetings between the two companies have already revealed that they have very similar methods of designing chips.

“I’ll be honest, I don’t think it’s really as difficult as some of the other combinations,” he said. “One of my management teams who didn’t know AMD said to me after a meeting, ‘Boy, they’re like us’.

Separately, AMD forecast fourth-quarter revenue above Wall Street expectations after the semiconductor designer announced the agreement to buy Xilinx.AMD expects current quarter revenue to be around $ 3 billion, plus or minus $ 100 million, compared to analysts’ average estimate of $ 2.63 billion, according to IBES data from Refinitiv.

Total revenue jumped 56% to $ 2.80 billion in the third quarter ended Sept. 26, above analysts’ expectations of $ 2.57 billion.

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